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Codelco Sees China Inflation as Worry for Copper

By

Andrea Hotter

April 6, 2011 12:20 p.m. ET

SANTIAGO—The inflationary environment in China is potentially of concern for the copper market, which remains structurally sound but will experience price volatility in the near term, the chief executive of Codelco said Tuesday.

In an interview during the annual Cesco industry week in Santiago,
Diego Hernandez
said the supply-demand outlook for copper remains positive and that there is no reason to expect this to change.

"At the end of 2010, we forecast the copper market to be tight through 2011 and 2012, and this hasn't changed and won't unless demand in China drops. I see no reason, so far, as to why this might change," he said. "The bigger concern in China now is inflation—food and oil-price inflation could be reaching levels where the government wants to cool the economy, and this will have an impact on copper," he added.

Codelco is the world's largest copper producer, with annual output of 1.69 million tons in 2010.

Industry participants have been increasingly worried that the Chinese government's attempts to cool the economy through rate increases and other tightening measures will derail copper demand and push prices back down from their all-time highs. The world's largest copper consumer, China has slowed its purchasing in recent months and stocks have risen.

But Mr. Hernandez said Chinese copper stocks, whether as collateral for other debt or otherwise, have ebbed and flowed over time and that the current situation was little changed from the past.

"The global fundamentals for copper are still intact—the quality of copper-mine projects coming on stream is worse than before, demand is firm and the producer response to tight supplies has been slow," he said, noting that although they are large in volume, new projects are of lower grades.

Mr. Hernandez said it is now easier for miners to finance projects because the speedy recovery of copper prices following the economic downturn saw revenues increase at a time when companies weren't spending. "Now miners have the cash to finance projects and don't need to go to the markets [to raise money]," he added.

Mr. Hernandez said that even if all the new projects in the pipeline were executed, they would take some time to balance out the supply side, underpinning copper prices in the meantime.

The advent of exchange-traded funds for copper will add to the volatility in the market but seem to be less of a concern now than they had initially appeared six months ago, Mr. Hernandez said. "I was concerned in October that ETFs could certainly impact the price of copper as they would require the purchase of physical metal, but we don't see any impact yet," he noted. To date, there has only been one physical-copper ETF launched, by ETF Securities, but its uptake has been slow. Other products are set to be launched by BlackRock and Goldman Sachs, as well as by J.P. Morgan. "These products shouldn't affect the price in the long term as supply and demand fundamentals will set the price of copper, but in the short term they will create volatility," he added.

This volatility stops newcomers in the market and delays investment decisions, he said.

Substitution has been an increasing factor for copper given the high price of the metal, used in housing and construction, but Mr. Hernandez said new uses for copper outweigh the loss of copper consumption due to cheaper alternatives.

"There are also some applications where copper isn't competitive any more, and we would have to be prepared to cut our prices in order to continue, and we're not," Mr. Hernandez added, citing copper in pipes as an example. "New applications for copper will compensate for the losses to substitution," he added.

Codelco Sees China Inflation as Worry for Copper

SANTIAGO—The inflationary environment in China is potentially of concern for the copper market, which remains structurally sound but will experience price volatility in the near term, the chief executive of Codelco said Tuesday.